The only thing colder than the wind today is the governments plan for Spanish banks (and stuff the home prices)

Get your house in order, and quick. Otherwise we’ll merge or close you.

That’s the basic attitude of the government plan to stabilize the Spanish financial sector, published yesterday by Minister for Economy Luis de Guindos.

The plan Guindos as it is known, will force banks to accumulate by years end 50 billion euros in cash and assets to write off losses from the real estate sector. 35 billion in cash, 15 billion in assets. House prices will plummet, but that’s life, according to de Guindos.

Why 50 billion? It’s to be added to the 60 billion in cash Spanish banks have slowly come up with over the last 3 years. And it’s the cover the fact that Spanish banks have 175 billion euros in toxic real estate loans. The “cushion” of having that money in the drawer allows banks to be more lenient in foreclosing unpaid mortgages, and helps to cushion the blow of houseowners who default on their debt, and helps service the immense loans taken out to buy half built blocks of flats, or over priced bits of land, that cover the nation.

Banks which can’t come up with the cash by the 31st of December will be forcibly merged into new superbanks and be frozen out of government backed cash. Banks must shed their unsold real estate and use cash to give out loans, warned de Guindos yesterday. House prices “will fall” in order to get rid of the backlog of unsold homes and get Spaniards back into homes.

“Banks are not real estate agencies or promoters” said de Guindos yesterday. He will force all banks to offer their homes at market value and if the market value falls, banks must accept the loss. That is why they need to accumulate so much cash, to offset the asset loss. Once they’ve disposed of the toxic assets at whatever price they can get for them, the healing can begin. If a bank looks like it is going to fail, it will, if necessary, be taken over by the State and merged with other banks to create healthy banks.

It is probable that not one bank in Spain will this year declare a profit, economists are warning, but that isn’t the governments problem. Profits can wait until 2013.

However, banks which voluntarilly admit they can’t comply and start to merge will be granted 2 years compliance, and will be able to ask for FROB cash short term loans (although director bonuses will then be cut).

Fedea, the economic thinktank, welcomed the moves, saying that “after four years of crisis, not only do we continue to see job destruction in Spain, but, what is worse, the speed of job destruction continues to increase, Strong medicine is needed”.

The de Guindos plan has been welcomed by the financial think tanks, who say it seems to be a strong and well thought out plan. It’s no surprise – de Guindos is an economist first and a politician second, a strong character who over the last decade has been well known at the top of the Spanish financial sector.

After all, the average Spaniard isn’t as obsessed by the value of their home as the English are. In general, they view homes as long term dwellings, and the day to day price doesn’t overly worry them, as job mobility in Spain is low (people tend to stay put in the same place for a long time). Certainly they worry about first time buyers getting onto the ladder, but, again, traditionally you might only have owned one house in your entire lifetime. They don’t really see houses as “ladders” in the way the English are conditioned to. They want to buy a home, and they want to be able to afford the mortgage on it. Something a lot of people can’t at the moment, as unemployment reaches levels never seen before. 177,000 people joined the dole in December, 283,000 people lost their jobs.

The maths are simple: at the moment, in Spain, there are 2,4 workers for every person on the dole. That’s simply not sustainable long or even medium term. Spain is heading for bankruptcy unless it does something fast. And it’s starting by attempting to reinvigorate its banks. It is going to thin the herd, and the ones that survive will be stronger for it. Banks have to dispose of the toxic assets that are weighing them down and start doing what banks are supposed to do – loan money. The state needs to get credit flowing to the private sector. At the moment, the only loans around are state backed ICO loans, the private banks don’t have cash to lend to small companies, and so we see companies going under, not due to lack of profitability, but due to lack of access to short and medium term credit. Which means more unemployment, less cash in the system, less money for banks to loan, and the circle gets ever faster.

Rajoy will present his plans for the employment sector within the next fortnight, and they too, if predictions are correct, will be strong stuff. The government has made no bones about the fact that the plans will be unpopular, and Rajoy was heard confessing to Merkel at the recent EU summit that “my plans will cost me at least one general strike”. But his intention to overhaul Spain’s outdated and almost medieval labour laws is clear.

Will this plan work to save Spains financial sector or will it fall by the wayside like most of the PSOE’s plans did? The plan is strong is intent, and even stronger in words. It appears a well thought out plan, and doesn’t commit the State to having to cover huge loans to the banks, which won’t affect Spains credit ratings. And the speed of the plan – it specifically says that all this must happen by the 31st of December 2012 – is reassuring.

If de Guindos doesn’t blink, if he can keep cracking that whip and keep those lions mesmerised into obeying his orders, he may well have become the first politician to tame the banks. But like the liontamer, if those lions come out of their trance…


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